The Lee Kong Chian School of Business Academic Year 2015 /16 Term 1

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1 The Lee Kong Chian School of Business Academic Year 2015 /16 Term 1 FNCE310 TRADE FINANCE Instructors Name : Jayesh Avlani / Cheng Yam San Title : Adjunct Faculty of Finance / Office : LKCSB Level 5 Adjunct Office COURSE DESCRIPTION The course will provide participants with the basic theory and traditional definition of the various payment / financing products applicable in international trade finance. Such product knowledge shall be applied to some case studies relating to structuring trade transactions. LEARNING OBJECTIVES (A) Introduction to Trade/International Trade and Exploring Business models of trading companies/trade finance banks; key service providers to commodity trading houses; international sale/purchase contracts key standard terms Understand concept of Trade and International Trade and its main players Compare the organization structures of trading (including commodity) firms and trade finance banks Appreciate the importance of networking with service providers in their future working career Be familiar with key contract terms in trade agreements/sales contracts Be aware of the increasing significance of compliance issues in International Trade (B) Exploring the various method of Payments in International Trade: Open Account Advance Payment/Prepayment Documentary Collections Documentary Credits Appreciate the different methods of payment methods in trade transactions Identify the merits and weaknesses/risks in the various payment methods Propose suitable mitigants to the risks identified (C) Documentary Collections, URC 522 Understand the two main types of Documentary Collection: Documents-Against Payment (DP) and Documents-Against-Acceptance (DA) Identify and differentiate the parties and mechanics to a documentary collection operation Appreciate the risks to importers and exporters who trade on documentary collection terms. Apply the articles of URC 522 to some case studies. (D) Documentary Credits, UCP 600, ISBP, URR 725 Identify and differentiate the parties and their roles in a documentary credit operation Be familiar with mechanisms of sight documentary credits and documentary credits available by acceptance or deferred payment. Be introduced to elements of documentary and other risks in documentary credit transactions. Be familiarized with the more significant articles of UCP 600 and Develop principal terms and conditions appearing on LCs particularly those that relate to the commodity business. 1

2 (E) Shipping documents in international trade Identify the distinct roles of commercial, transport, financial, insurance documents, etc. Evaluate documentary risk relating to commodity trade. (F) Incoterms Appreciate/compare and contrast the responsibilities of buyers and sellers in respect of contract of carriage, insurance, export/import licenses under Incoterms. Identify and evaluate the passing of risks on shipment and delivered terms. (G) Special types of Credits: transferable, assignment of LC proceeds, back to back letters of credit, red and green clause LCs; Confirmed LCs Identify and differentiate the various special types of credits and their mechanics, their key terms and conditions as well as their attendant risks and Apply them to the structuring of international trade transactions. (H) Demand guarantees and standby LCs- URDG 758 and ISP 98 Identify and differentiate the various types of demand guarantees and standby LCs, their key terms and conditions as well as their attendant risks and Apply them to the structuring of international trade transactions. (I) Banking Facilities and Services for Importers and Exporters (including forfaiting, factoring) Distinguish the types of financing products applicable to importers and exporters by way of case studies Apply them to the structuring of international trade transactions. ASSESSMENT METHODS Class participation: 10% Mid- term paper: 40% (2 Written Assignments 1 at end of each Term, 20% each) Final Examination: 50% (Open Book) TOTAL: 100% PRE-REQUISITE/ CO-REQUISITE/ MUTUALLY EXCLUSIVE COURSE(S) Please refer to the Course Catalogue on OASIS for the most updated list of pre-requisites / co-requisites for this particular course. Do note that if this course has a co-requisite, it means that the course has to be taken together with another course. Dropping one course during BOSS bidding would result in both courses being dropped at the same time. ACADEMIC INTEGRITY All acts of academic dishonesty (including, but not limited to, plagiarism, cheating, fabrication, facilitation of acts of academic dishonesty by others, unauthorized possession of exam questions, or tampering with the academic work of other students) are serious offences. All work (whether oral or written) submitted for purposes of assessment must be the student s own work. Penalties for violation of the policy range from zero marks for the component assessment to expulsion, depending on the nature of the offence. When in doubt, students should consult the course instructor. Details on the SMU Code of Academic Integrity may be accessed at 2

3 RECOMMENDED TEXT AND READINGS No textbook. Referrals will be made to ICC Publications on Incoterms, URC 522, UCP 600, ISBP, URR725, URDG758 and ISP98. 3

4 WEEKLY LESSON PLANS Week No. Specific Learning Objectives for the Lesson Concepts / Topics Covered Required Reading Assessment of Learning (Formative / Summative) Instructional Strategies 1 - Understand how trade finance is featured within trade houses and commercial banks - Appreciation of compliance issues in international trade Business models of trading companies and trade finance banks. Principal players supporting the traders. Dry bulk and oil companies involving carriage by sea. Oral questioning Ice-breaker & Introduction(30 mins) Group discussion of service providers to traders (30 mins) - Examine support services working for trade houses Trade/trade environment and trade networks. Movements of goods from seller to buyer. Summary: 15 mins. - Identify trade houses worldwide (future employers) - Appreciate key terms common to international sale/purchase contracts Key terms peculiar to sale and purchase contracts 2+3 List common trade/shipping terms and their abbreviations. Compare seller s and buyers responsibilities in respect of contract of carriage, insurance, export and import licences. Highlight passing of risk under INCOTERMS Standard Trade Terms /Shipping Terms used in International Trade (INCOTERMS 2010) Recommended reading: - Incoterms 2010 (ICC Publication) Ice-breaker & Introduction (30 mins) Class discussion/lecture on sellers responsibilities, buyer s responsibilities and transfer of risk under each Incoterm. Summary (15 mins) 4

5 4 Classify shipping documents as follows: commercial, transport, financial, insurance, others Examine each document in detail in terms of role/function, its contents, types/variations, etc. Emphasize documentary risks in trade transaction Standard Documents used in International Trade Written assignment on Incoterms & Shipping Documents, or generally on International Trade to be handed in on Week 7 s Ice-breaker & Introduction (15 mins) Display sample shipping documents for discussion. Lecture (2.5 hours) 5 Introducing parties to a documentary collection operation - principal, remitting bank, collecting bank and presenting bank and drawee. Discussion on the role and responsibilities of collecting bank. Terms of Payment in International Trade: Documentary Collection Recommended: Uniform Rules For Collections (URC 522). ICC Uniform Rules for Collection a Commentary s Icebreaker & Introduction (30 mins) Display collection instruction Examine outward collection and inward collection bank considerations. Discussion on DP and DA payments Reference: Schmitthoff: The Law & Practice of International Trade, 12 ed, by Carole Murray, Halloway & Timson-Hunt, mainly, Chapter 10 Collection Arrangements, Chapter 11 Letters of Credit Group discussion of risks to exporters selling on documentary collection terms. Summary (15 mins) 6+7 Introducing parties to a documentary credit applicant, issuing bank, beneficiary, correspondent bank (advising, confirming, nominated, negotiating bank) Discussion on principal contents of a letter of credit Examine bank s considerations in issuing LC and exporter s Documentary Credit Various forms of Documentary Credit sight, deferred payment, acceptance credits Recommended: ICC Uniform Customs and Practice for Documentary Credits (UCP 600) International Standard Banking Practice Icebreaker and Introduction ( 30 mins) Display sample LC contents Display samples of transferable and back to back LCs 5

6 considerations in examining LC on receipt Discussion on bank considerations in the examination of export documents discrepancies. ICC Uniform Rules for Bank- to- Bank Reimbursements under Documentary Credits Reference: Schmitthoff, Chapter 11 on Letter of Credit Summary (30 mins) 8 Mid-term Break 9+10 In-depth explanation of special types of credit Compare and contrast transferable and back-to-back credit. Risks/Control features Compare and contrast red and green clause LCs Risks and control features Special types of Credit - Transferable/Assignment of Proceeds - Back-to-back - Red clause - Green clause - Confirmed LCs Case studies of above products Ice-breaker and Introduction (30 mins) Display samples of red clause and green clause LCs. FCRs, Warehouse receipts, inspection certificates Summary(15 mins) 11 In-depth explanation of various types of demand guarantees and Standby LCs and their application to trade transactions and construction projects. Types of Demand Guarantees, and Standby LCs Recommended: - ICC Uniform Rules for Demand Guarantees URDG International Standby Practices ISP 98 Ice-breaker and Introduction (30 mins) Display sample formats and structures of common types of guarantees and standby LCs 6

7 12+13 In-depth explanation of import financing: Overdrafts/short term loans, Trust Receipts, Shipping Guarantees, Stock Financing (Collateral Management) In-depth explanation of export financing: Receivables Financing under documentary collection and documentary credit Banking Facilities and Services for Importers and Exporters Case Study of a Local Coffee/Cocoa Trader Ice-breaker and Introduction (30 mins) Lecture (4 hours) Case Study approach: emphasis on applications. Summary (30 mins) General introduction to other financing services: Factoring and Forfaiting 14 REVISION Comments on assignment and attempting past examination questions. 15 FINAL EXAMINATION 7

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